Yuan strengthens to one-week high after China’s central bank acts on lending

The People’s Bank of China has restricted some lending activities by banks in Shanghai’s free-trade zone, according to a report, its latest attempt to calm nerves over the currency

PUBLISHED : Friday, 17 August, 2018, 1:46pm
UPDATED : Friday, 17 August, 2018, 11:13pm

China’s yuan rose to a one-week high on Friday, helped by a report that the central bank had restricted some forms of lending in its latest effort to calm nerves over the currency, which has lost 10 per cent against the US dollar since a peak in March.

The Shanghai branch of the People’s Bank of China (PBOC) banned banks in its free-trade zones from certain lending activities, Reuters reported, citing two sources. The restrictions closed off channels used to deposit and lend yuan offshore through interbank accounts that are managed by Chinese banks in the pilot free-trade zone in Shanghai, the report said.

The onshore yuan, traded on the mainland, rose 0.12 per cent Friday afternoon to 6.8770 per dollar, and heading for its strongest close since August 10. Offshore yuan, traded by international investors outside China, was little changed at 6.8619 after yesterday’s surge.

The latest PBOC guidance was aimed at offshore trading desks, while the central bank has refrained from intervening in the currency market directly.

“A fast depreciation is not desired by the PBOC,” said Alicia Garcia Herrero, the chief economist for Asia-Pacific at Natixis. “Considering that China still holds massive foreign reserves and has a very tight command of the banking sector, it should be possible for the monetary authority to redirect the yuan in its desired direction.”

The real reasons the yuan fell had little to do with Chinese manipulation

Pressure from the US-China trade war and more recently from the Turkey lira crisis, which has weighed on the emerging-market asset class, have combined to put pressure on the yuan, pushing the PBOC to act.

On Friday, the PBOC raised the daily yuan reference rate for the first time in seven days, up by 0.08 per cent to 6.8894 per dollar. It permits the currency to trade 2 per cent above and below the reference point each day.

Earlier this month, the PBOC was reportedly using moral suasion to tell Chinese banks to avoid “herd behaviour” when trading the currency. In late July, it raised the reserve requirement ratio to 20 per cent from zero for financial institutions when they conduct onshore yuan forwards business on behalf of customers, making it more expensive to short the currency.

Ji Tianhe, China strategist at BNP Paribas, said that all three channels of downward pressure on the yuan were now restricted, including forward purchases by companies, yuan selling by onshore banks and now the latest guidance on offshore banks.

“With today’s guidance on offshore banks, we think the [US dollar] will be the main driver of the yuan. Given the expected Federal Reserve rate hikes and general sentiment being US dollar positive, we

think the yuan could fall to 7.0 per dollar,” Ji said.

The market expects the US Federal Reserve to reaffirm its gradual rate rise path during its Jackson Hole Symposium on August 24-25, before lifting the Fed Funds Rate above its 2 per cent inflation target to 2.25 per cent at its next Federal Open Market Committee meeting on September 26.